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Equity markets closed mixed across the globe, while the Nasdaq
reached another record high. Benchmark government bonds, credit
indices, municipal bonds, and Brent/WTI all closed higher on the
day. Multiple positive early stage COVID-19 vaccine trials and
emerging discussions of new government stimulus packages continues
to create additional optimism in the markets.
Americas
Most US equity markets closed higher, except for the Russell
2000 -0.4%; Nasdaq +2.5%, S&P 500 +0.8%, and DJIA flat. Nasdaq
closed at a new record high of 10,767 today.
10yr US govt bonds closed -2bps/0.62% yield.
CDX-NAIG closed -1bp/70bps and CDX-NAHY -10bps/462bps.
Crude oil closed +0.8%/$40.92 per barrel.
The IHS Markit AAA Municipal Analytics Curve (MAC) rallied 2bps
across the curve and yields have improved 8-10bps over the past
week:
The below chart shows the recovery across various fixed income
indices since the lows in March, with the IHS Markit iBoxx iShares
$ Investment Grade Corporate Bond Index, the iBoxx £ Corporate
Index, and the iBoxx Trepp CMBS Current AAA Index now higher than
February's peak levels. However, the iBoxx Trepp CMBS Current BBB
Index has recovered the least among the included indices, as it
remains 19% below its February peak.
A coronavirus vaccine in development by the University of
Oxford and AstraZeneca Plc showed promising results in early human
testing. China's CanSino Biologics Inc. and a partnership of Pfizer
Inc. and BioNTech SE also delivered positive trial updates,
indicating progress in the pursuit to defeat the pathogen.
(Bloomberg)
In the week ended 4 July, US states reported 1,383,786 initial
claims of unemployment, a modest improvement compared with the
prior week as initial claims fell by 37,272. Claims fell in 30
states but there were sizable increases in several states led by
Texas, New Jersey, and Maryland. (IHS Markit Economist Alex
Minelli)
Continuing claims of unemployment, which lag initial claims by
one week, numbered 16,283,192 in the week ended 27 June. Declines
occurred in 38 states as continuing claims fell by 920,842 (5.2%)
from the previous week.
The insured unemployment rate, equal to continuing claims
divided by covered employment, fell by 0.6 percentage point to
11.3% as 36 states saw a decrease in the week ended 27 June.
Continuing claims in the week ended 27 June numbered
16,283,192, down 920,842 from the week ended 20 June. Of the 38
states where continuing claims decreased, the largest declines were
in Florida (down 206,920), North Carolina (down 51,215),
Pennsylvania (down 48,857), Georgia (down 41,286), and Washington
(down 35,629). The large decrease in Florida was due to its
prolonged filing backlog and exacerbated by the biweekly system the
state reimplemented back in May.
About one in four office employers intend to reduce their
footprint by at least a fifth, and about 16% expect to move jobs
out of the city, according to the Partnership for New York City, an
influential group composed of corporate chief executives, which
enlisted over a dozen consulting firms to work for free to conduct
the study. Companies also expect only 10% of their employees to
return to the office this summer and just 40% by year-end,
according to the survey, which was conducted in May and released
Monday. (Bloomberg)
In a press release, Chevron Corporation announced the signing
of an agreement to acquire Noble Energy, Inc. in an all-stock
transaction valued at $14.4 billion. (IHS Markit Upstream Companies
and Transactions' Karan Bhagani)
The transaction is expected to close in the fourth quarter of
2020. Under the deal, each Noble Energy shareholder will receive
0.1191 shares of Chevron for each Noble Energy share.
The total equity offer value is $4.98 billion or $10.38 per
share based on Chevron's closing price on 17 July 2020. The offer
price is a 12% premium to the 10-day average closing price of Noble
Energy.
The total transaction value includes the assumption of Noble's
31 March 2020 working capital surplus of $562 million and $9.94
billion of long-term debt and liabilities.
On closing, Noble Energy shareholders will own 3% of the
combined company. The transaction will add 336,000 net acres across
the DJ Basin, 92,000 net acres in the Permian Basin and 35,000 net
acres in the Eagle Ford to Chevron's portfolio, the company
said.
DJ Basin assets produced around 150,000 boe/d (~70% liquids),
Permian Basin around 65,000 boe/d (~80% liquids) and Eagle Ford
assets produced 55,000 boe/d in 2019. Noble's key assets in other
countries are as follows: Leviathan (39.6%) and Tamar (25%) fields
in Israel, Alba field (33.75%), Block I (38%) and Block O (45% and
operator) in Equatorial Guinea, Block 12 (35% and operator) in
Cyprus and two exploration blocks (North Cleopatra and North
Marina) in Egypt.
Noble Energy's net proved reserves were 12.29 Tcfe (66% gas,
73% developed) at year-end 2019 and production averaged 233.8
MMcfe/d (54% oil and NGLs) during the first quarter of 2020.
Celanese has agreed to sell its 45% share of Polyplastics to
Daicel, its partner in the joint venture, for $1.575 billion in
cash. Celanese says it will use the proceeds of the transaction,
which is expected to close this year, for share repurchases and
organic growth. Polyplastics will become a wholly owned subsidiary
of Daicel, which says the deal is key to the restructuring of its
plastics segment. Celanese and Daicel founded Polyplastics, a
supplier, marketer, and manufacturer of engineered materials, in
1964. Major products include acetyl copolymer (also known as
polyoxymethylene, or POM), liquid-crystal polymer (LCP), and
polyphenylene sulfide (PPS).
Ashland says it expects second-quarter sales to fall 10% year
on year (YOY), to $574 million, with second-quarter adjusted
earnings from continuing operations totaling $51 million, or 84
cents/share. "Strength in many consumer markets was offset by
industrial weakness across the globe," Ashland says. "Our consumer
business units performed particularly well as we experienced
significantly stronger demand for pharmaceutical excipients,
biofunctional ingredients, and additives for hand sanitizers," says
Ashland chairman and CEO Guillermo Novo. "While our industrial
businesses felt the impact of reduced global demand during April
and May, the teams began to see signs of improving demand trends in
June." Adjusted EBIDTA, however, grew 2% YOY during the quarter, to
$143 million, due to cost-cutting measures. Ashland will report
full second-quarter results on 28 July.
Autonomous truck startup Plus.ai seeks USD60 million in latest
funding, reports The Information. According to the report, Hong
Kong-based investment and securities firm Guotai Junan
International is expected to lead the funding, which will value
Plus.ai in the range of USD600 million to USD1 billion. Plus.ai,
which was founded in 2016, aims to make commercial freight
transportation safer, more efficient, and less expensive for its
customers. The company has raised USD200 million in funding over
three rounds. (IHS Markit Automotive Mobility's Surabhi
Rajpal)
The US state of California's Department of Motor Vehicles (DMV)
has issued a permit to AutoX to test its autonomous cars without a
human backup driver, reports TechCrunch. The permit will allow the
company to test its vehicle on designated streets near its
headquarters in San Jose. The vehicle is approved to operate in
fair weather conditions and light precipitation on streets with a
speed limit of 45 mph. AutoX is the third company after Waymo and
Nuro to receive a permit from the DMV for driverless testing.
Currently, 62 companies, including Tesla, Ford, BMW, Nvidia,
Volkswagen (VW), and General Motors (GM), have received permits
from the DMV for testing their autonomous vehicles (AVs) on public
roads with a safety driver on board. AutoX has recently partnered
with Alibaba's mobility app operator AutoNavi to launch a robotaxi
service in Shanghai's Jiading district. (IHS Markit Automotive
Mobility's Surabhi Rajpal)
President Jair Bolsonaro on 15 July signed into law the
Sanitation Bill passed by Congress on 24 June. The new law will
permit the participation of the private sector in water provision
and sewage treatment, potentially opening up USD140 billion in new
investment opportunities. (IHS Markit Country Risk's Carlos
Caicedo)
The law seeks to provide universal sanitation coverage by 2033,
with estimated investments of USD8.8 billion a year, versus the
current USD2.2 billion.
The sanitation sector is the responsibility of local and
regional state-owned companies, but they lack the resources to
undertake large projects, offering major opportunities to private
investors. Only 6% of sanitation firms in Brazil are privately
owned, the rest are run by state-owned companies operating at state
and city levels. However, most regions and municipalities are
struggling with heavy fiscal deficits, with current expenditure
requiring most of their budgets.
The new framework improves regulatory clarity and strengthens
legal certainty while promoting competition through compulsory
bidding.
Sanitation is likely to attract private investment in the next
two years, but not at the rate suggested by the federal government,
given the expected legal challenges by local authorities and
resistance from some quarters in Congress. Companies already
operating in the sector are likely to commit to new investment, but
newcomers are more likely to wait for further clarity on the
regulatory environment.
Fitch Ratings on 16 July lifted its long-term foreign-currency
issuer default rating (IDR) on Suriname to CC (75) from RD (85),
driven by the completion of the consent solicitation to reschedule
principal payments of the country's 2023 notes and amend terms of
related accounts agreement. In Fitch's view, this event constitutes
the execution and completion of a distressed debt restructuring,
assessing that a broader restructuring is probable. The leading
political party in the new government, the Progressive Reform Party
(Vooruitstrvende Hervormde Partij: VHP), considers that debt
restructuring is one way to improve government debt sustainability.
On a similar argument, S&P Global Ratings (S&P) upgraded
its long-term foreign-currency sovereign credit rating to CCC (65)
from SD (80). The sovereign rating upgrade reflects Suriname's
post-restructuring creditworthiness following bondholders' consent
on 9 July to amend the terms of Suriname's USD125-million December
2023 bond. (IHS Markit Sovereign Risk's Claudia Wehbe)
Europe/Middle East/ Africa
Most European equity markets closed higher except for UK -0.5%;
Germany/Italy +1.0% and France/Spain +0.5%.
10yr European govt bonds closed higher across the region; Italy
-9bps, Spain -5bps, and France/UK/Germany -2bps.
iTraxx-Europe closed -3bps/59bps and iTraxx-Xover
-22bps/345bps.
Brent crude closed +0.3%/$43.28 per barrel.
Finnish price growth stalled amid extremely weak pressures from
both demand and supply sides in the second quarter. Mainly due to
the latter's effects, some acceleration in inflation is expected in
the second half of 2020, but the outlook is shrouded with major
uncertainty. (IHS Markit Economist Venla Sipilä)
Finland's consumer prices remained stable in June in annual
comparison, after deflation rates of 0.3% and 0.2% year on year
(y/y) in April and May, respectively, reports Statistics Finland.
Compared with May, inflation was intensified in June mainly owing
to the increased prices of long-distance passenger transport and
wireless telephone services.
The prices of cigarettes, long-distance transport services, and
children's day care increased the most y/y in June. Annual
inflation was mostly curbed by the falling costs of gasoline
(petrol), hotel accommodation, diesel, and light fuel oil.
Increased gasoline prices were instrumental in pushing
month-on-month (m/m) inflation to 0.2% in June. Core inflation,
which excludes the impact of food- and energy-price changes, stood
at 0.3% in June.
Using the European Union's Harmonized Index of Consumer Prices
(HICP) inflation measure, Finnish prices remained unchanged y/y in
June, following a deflation of 0.1% y/y in May. Preliminary results
for the eurozone show HICP inflation at 0.3% y/y, following 0.1% in
May.
Finally, the HICP at Constant Taxes (HICP-CT) in June for
Finland show a rate of -0.1% y/y, suggesting an impact of 0.1
percentage point from the changes in commodity tax rates on
inflation.
Spanish pharmaceutical company Grifols will invest
approximately USD460 million in the acquisition of blood plasma
processing facilities in Canada and the United States, according to
a statement from the company. As part of an agreement with South
Korean-based GC Pharma (Group), Grifols will buy a plasma
fractionation facility and two purification facilities in Montreal,
Canada, as well as 11 plasma collection centers in the United
States. The Montreal-based facility will have a fractionation
capacity of 1.5 million liters per year. The deal is subject to the
necessary regulatory approvals and is expected to be completed
before the end of 2020. The investment will strengthen the
company's footprint in both Canada and the US. The acquisition of a
fractionation plant in Montreal positions Grifols to become the
only large-scale commercial manufacturer of plasma products in
Canada once it secures the necessary approvals. (IHS Markit Life
Sciences' Ewa Oliveira da Silva)
Covid-19 has created a shift in global vanilla demand this
year. World vanilla prices have drifted lower over the first half
of this year on expected higher production. This is in line with
IHS Markit's expectations back in December 2019, when it published
its Global Outlook supplement. What was not anticipated though was
that the world would be hit by a major pandemic in early 2020,
resulting in thousands of deaths and causing major disruption to a
multitude of sectors, including of course, agricultural
commodities. The lockdown appears to have generated increased
demand for vanilla at supermarket level in recent months, helping
to offset a decline in offtake on the foodservice side of the
industry. With Covid-19 forcing the closure of restaurants and
other foodservice outlets and consumers in lockdown, vanilla has
lost these key end use outlets. However, as a stay-at home treat,
consumers have increased their purchases of products that contain
vanilla. This includes the obvious examples of ice cream, yogurts
and confectionery. It is open to debate whether this upturn in home
consumption will fully make up for the shortfalls in foodservice
offtake. The picture is further confused by the possible gradual
reopening of restaurants, cafes and pubs etc in parts of Europe and
other global destinations. IHS Markit still believes that a
significant decline in prices is likely over the second half of
this year. This could be by as much as 50% or more from prices
prevailing in early June. A level around USD100/kg certainly looks
possible by the end of this year as new crop supplies reach the
market. It would be preferable if prices did not fall any lower
than USD100/kg as anything below this level risks loss of interest
among other origins, with Madagascar taking over control of the
global market again. (IHS Markit Food and Agricultural Commodities'
Julian Gale)
In January-May, Slovenia's current-account deficit narrowed,
undermined by lost service exports. Meanwhile, external debt levels
rose as portfolio investments flowed into the country, attracted by
new public debt offerings. For 2020 as a whole, the current-account
surplus will be down and total external debt will be up. (IHS
Markit Economist Andrew Birch)
In January-May 2020, Slovenia's current-account surplus
narrowed as compared to a year earlier. The headline
current-account surplus slipped in spite of a rising
merchandise-trade surplus. While merchandise export losses were
severe in the first five months of the year - equaling 14.2% year
on year (y/y) - the drop-off of imports was even starker, at 16.5%
y/y.
Offsetting the rising trade surplus was a y/y deterioration of
the services surplus. Lost tourism and transport service exports
reduced the surplus, thus drawing down the headline current-account
balance.
As the global financial markets shifted to safe havens in the
height of the pandemic, Slovenia benefited as a member of the
eurozone, with a surge of net inflows of portfolio investment in
April and May.
Rising public debt securities attracted those portfolio
investment inflows, driving up general government debt during the
course of the first five months, by nearly EUR3.8 billion. This new
public borrowing pushed up headline debt despite the still large
current-account surplus.
During a virtual meeting held over 22 June-10 July, the Zambian
government and the IMF held discussions on the necessary economic
policies needed to mitigate the fallout from the COVID-19 pandemic
on the country's overall economic activity, poverty levels, and
fiscal finances in the short to medium term. (IHS Markit Economist
Thea Fourie)
The Zambian government has stated its intention to secure
emergency financing under the IMF's Rapid Credit Facility. Zambia
has also requested support under the G20's Debt Service Standstill
Initiative (DSSI).
"The social and macroeconomic impact of the COVID-19 shock, on
top of a severe drought last year, will be heavy," the IMF warns.
The IMF expects Zambia's economy to contract by 5.0% during 2020,
while the number of people living in extreme poverty is expected to
rise. In addition, fiscal pressures during 2020 have increased due
to lower government revenue and rising spending needs.
Asia-Pacific
APAC equity markets closed mixed; China +3.1%, India +1.1%,
Japan +0.1%, South Korea/Hong Kong -0.1%, and Australia -0.5%.
The Shanghai Composite closed 3.1% higher after China's
regulators raised the limit on how much insurers can invest in
equity assets to 45%, bringing fresh money into the stock market.
(Seeking Alpha)
China's public fiscal revenue grew 3.2% year on year (y/y) in
June, up 16.2 percentage points from May and the first expansion
time since the beginning of this year, according to release by the
Ministry of Finance (MOF) on 17 June. (IHS Markit Economist Yating
Xu)
Tax revenue improved from contraction in the previous months to
9% y/y expansion as value-added tax declined at a slower pace with
accelerating industrial production and corporate income tax
rebounded due to half-year final settle.
Consumption tax and import value-added tax and consumption tax
returned to expansion, reflecting improvement in retails sales and
unexpected recovery in imports.
Non-tax revenue remained in 16.8% y/y contraction as
state-owned enterprises' profit contribution declined amid the
epidemic.
Public fiscal spending declined 14.4% y/y in June, enlarging by
10.5 percentage points from May and the largest contraction since
2005.
Local government spending fell 15.2% y/y, leading the headline
decline. Spending on urban and rural community affairs was the main
drag, falling 49% y/y, probably due to the flooding in southern
China.
Education, accounting for nearly 15% of total fiscal spending,
declined 16% y/y.
Moreover, health and social security spending registered
double-digits decline as domestic pandemic eases. The positive side
is that spending on culture and sports as well as transportation
improved to expansion as economy gradually recovers. Debt interest
payment growth accelerated to 23%.
Government fund spending increased 43.7% y/y in June from 12%
y/y in May, following nearly CNY1 trillion worth of local
government bond issued in May.
Land sales revenue rose by 5.2% in the first half, compared to
the target set at 3% y/y, which could be financing source for local
government spending.
The fiscal revenue in the first half declined by 10.8% y/y with
sharp contraction in the first quarter and sustained recovery in
the second quarter.
Fiscal spending declined by 5.8% y/y with urban and rural
community affairs and energy conservation leading the
contraction.
Chinese new vehicle sales continued to gain traction in June as
the market recovers from the COVID-19 virus pandemic. New vehicle
sales on a wholesale basis rose by 11.6% year on year (y/y) to 2.30
million units last month, while production increased 22.5% y/y to
2.32 million units, according to data from the China Association of
Automobile Manufacturers. (IHS Markit AutoIntelligence's Abby Chun
Tu)
Thanks to a rebound in new vehicle demand that began in April,
new vehicle sales and production volumes in the year to date (YTD;
January to June) are narrowing the gap with the same period last
year. New vehicle sales volumes in the YTD have surpassed the
10-million mark despite a decline of 16.9% compared with the same
period of 2019.
In June, sales of passenger vehicles (PVs) continued to
increase, posting moderate growth of 1.8% year on year (y/y) to
1.76 million units.
Commercial vehicle (CV) sales surged 63.1% y/y to 536,000 units
during June on the back of strong demand for light commercial
vehicles. In the first half of 2020, sales of CVs have risen by
8.6% y/y to 2.38 million units, contributing largely to the rebound
in new vehicle sales.
The CAAM's data also indicates that Chinese brands lost market
share to foreign rivals in the first half of the year. The combined
PV sales of Chinese brands totaled 590,000 units, down 11.6% y/y,
in June. The market share of Chinese brands is estimated at 33.5%
in June, down 5 percentage points from June 2019. The data also
indicates the PV market share of Chinese brands has decreased to
the lowest level since the beginning of 2018.
Chinese electric vehicle (EV) startup Xpeng Motors (Xpeng) has
raised USD500 million in its latest funding round, reports Reuters
citing a company statement. The investors joined the new round of
funding include Aspex, Coatue, Hillhouse and Sequoia Capital China.
The new funds raised will enable Xpeng to develop its intelligent
vehicle technologies. The startup also plans to have around 200
showrooms in China by the end of this year. (IHS Markit
AutoIntelligence's Abby Chun Tu)
Dongfeng Motor Group launched its premium electric vehicle (EV)
brand on 17 July. The brand, whose name currently has been
presented in Chinese characters only (an approximate English
translation of which is 'Blueprint'), will have a new logo
different from Dongfeng's main brand, Dongfeng. At the launch event
for the brand, Dongfeng confirmed that the new brand's product
line-up will be designed to tap the premium EV market. The brand
and its product strategy is to be managed by a dedicated subsidiary
of Dongfeng. The new subsidiary is to be led by Lu Fang, an
automotive industry veteran who has experience in vehicle
engineering and held various roles at FAW Group between 2006 and
2018 before joining Dongfeng. Dongfeng is looking to introduce nine
models under the new brand, including sport utility vehicles (SUVs)
and multi-purpose vehicles, with the first one hitting the market
in 2021. (IHS Markit AutoIntelligence's Abby Chun Tu)
Japan's Ministry of Economy, Trade and Industry on 17 July
announced JPY57.4 billion (USD536 million) in subsidies for 57
Japanese companies to invest in production in the country. Another
30 companies were allocated JPY12.6 billion in subsidies for
investments in factories in Southeast Asia. Part of the fiscal 2020
supplementary budget, the government's JPY220-billion subsidy
program aims to reduce reliance on manufacturing in China by
encouraging companies to shift production to Japan or diversify
output. The subsidies prioritize the production lines of high-added
value products, such as auto parts, aviation parts, and
electronics. The pharmaceutical industry is also prioritized to
ensure the procurement of items such as personal protective
equipment (PPE) during the COVID-19 virus pandemic. IHS Markit
assesses that the government's subsidy program will likely be
successful in reducing Japan's supply chain reliance on China over
the coming year. A shift is already under way because of ongoing
territorial disputes in the East China Sea, anti-Japanese
demonstrations in China, and the deterioration in China-US
relations, all of which have led Japan to review its reliance on
Chinese supply chains. (IHS Markit Country Risk's Hannah
Cotillon)
Japan's trade balance turned to a deficit of JPY269 billion
(USD2.5 billion) in June from a surplus of JPY588 billion a year
earlier on a non-seasonally adjusted basis, but the seasonally
adjusted deficit narrowed by 27.6% from the previous month to
JPY424 billion. (IHS Markit Economist Harumi Taguchi)
While the trade deficit reflected a continued large contraction
of exports (26.2% year on year [y/y]) outpacing the decline for
imports (14.4% y/y), the softer deficit relative to the
month-earlier level was due to the first month-on-month (m/m)
increase in exports (up 1.4%) in five months because of the
reopening of economic activities in Japan's trade partners.
Global containment measures continued to severely dampen
Japan's exports of transport equipment, as a 41.1% y/y drop in
exports of transport equipment accounted for 9.5 percentage points
of the contraction of total exports.
Decreases of exports of ordinary machinery, iron and steel, and
chemical products were also major contributors to sluggish
exports.
By region, declines softened for exports to the US (down 46.6%
y/y) and the European Union (down 28.4% y/y), but a faster decrease
in exports to Asia (down 15.3% y/y) largely reflected a steeper
contraction of exports to ASEAN markets (down 1.9% y/y).
The fall in imports was due largely to weak prices of oil and
other resources, as the decline in import volume softened to a 0.2%
y/y drop from a 14.5% decrease in May.
Imports of mineral fuel remained a major contributor (9.9
percentage points) to the contraction of total imports. Other major
factors behind the steep decline included imports of autos (down
49.9% y/y), aircraft (down 78.5% y/y), and clothing and accessories
(down 17.1% y/y), reflecting weak demand despite the lifting of
Japan's state of emergency in late May.
Hyundai and Korea Gas Corporation (KOGAS), a state-run natural
gas company, have signed a memorandum of understanding (MoU) to
form a joint venture (JV) to establish and operate integrated
hydrogen charging stations, reports The Korea Herald. The
integrated hydrogen charging stations will be able to carry out
several functions such as hydrogen production, charging, selling,
and fuel-cell power generation. The stations will produce hydrogen
from natural gas supplied by KOGAS and also sell leftover hydrogen
or use it to generate electricity. Hyundai is already part of the
South Korean government-led special purpose company (SPC) to
establish fuel-cell electric vehicle (FCEV) charging infrastructure
in the country. The automaker along with KOGAS, Air Liquide Korea,
and 10 other companies set up the Hydrogen Energy Network (HyNet)
in March 2019 to build 100 hydrogen chargers across the country by
2022. (IHS Markit AutoIntelligence's Isha Sharma)
Posted 20 July 2020 by Chris Fenske, Head of Fixed Income Research, Americas, IHS Markit
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